Separating managerial inefficiency and external conditions in data envelopment analysis

In this paper, we highlight the importance of appropriately dealing with non-controllable inputs in technical efficiency evaluations by using DEA. In order to do this, the two most important options that exclusively use DEA methodology for the incorporation of these variables - the one-stage model by Banker and Morey [Operations Research 34(4) (1986a) 513] and the three-stage method developed by Fried and Lovell [Searching the Zeds, Working paper presented at 11 Georgia Productivity Workshop, 1996] - are compared both methodologically and empirically. At the same time, we propose a modification to the latter model which allows us to improve its results and interpretation. The education sector has been selected for the empirical application, the reason being that it has the desirable feature that, in the productive process, the students' socio-economic and family status (a non-controllable input) has a direct influence on the school results. The results obtained show the superiority of the multi-stage approach. It is argued that the model developed by Banker and Morey does not deal appropriately with inefficient units, as producer's behaviour in this model does not reflect the objective situation faced by such DMUs. (C) 2002 Elsevier Science B.V. All rights reserved.